States Buy Israeli Bonds, Stirring Up Controversy

THE Arab-Israeli conflict may be spreading to the most unlikely of battlefields: the bond-buying habits of American states.

Ten states, ranging from North Dakota to Massachusetts, have purchased Israeli bonds for retirement funds or as general treasury investments. Their purchases account for about 8 percent of Israel's total $650 million in bond sales in the United States last year.

Some state and local governments are bound by laws that either explicitly prohibit the purchase of foreign bonds or - more commonly - do not specifically authorize the government to buy securities overseas. Bills have been passed in a number of states, including Texas and Florida, to authorize foreign bond purchases.

A law allowing foreign bond purchases passed recently in Ohio, but not before generating opposition from Arab-American groups. A similar debate may be brewing in California, where a bill has passed the state Assembly.

Peter Timko of the Arab-American Institute in Washington argues that it is inappropriate for states to purchase bonds with proceeds that may be used to pay for Israeli settlements in the West Bank, Gaza Strip, or Golan Heights. "US foreign policy is opposed to that, and buying bonds would send a signal counter to what the US government wants to send," Mr. Timko argues.

Saul Friedman, director of institutional investments for the Development Corporation of Israel, which sells state of Israel bonds, responds that there is nothing political about states purchasing the securities. It is simply good business sense, he says.

The Development Corporation sells four different bonds that carry a competitive interest rate of about 6 percent and receive preferential tax treatment in the US. Since its establishment in 1951, the Israeli bond campaign has sold about $13 billion worth of bonds, and repaid more than half that amount. Israel has never defaulted on bonds or made late payments, Mr. Friedman says.

Despite the opposition of some Arab groups, Friedman says the Israeli bond campaign had its most successful year ever in 1992, selling a total of $1.2 billion around the world. That is up from the 1989 total of $753 million. Much of the funds raised by bond sales will help pay for the costs of housing, training, and job placement for an estimated 1.25 million immigrants to Israel over the next six years.

Timko says that the increased bond sales are necessary for another reason: US assistance to Israel is expected to decrease over the next few years. Israel has traditionally been the top recipient of American foreign aid, getting more than $3 billion annually in direct and indirect assistance. Now, "rather than seeking federal money, Israel is seeking investments from individual states," Timko says.

IN Ohio, a bill allowing state tax dollars to be used to purchase foreign bonds sailed through the state Senate with little opposition, but generated controversy before passing the state House of Representatives. The state employee retirement fund already has invested $10 million in Israeli bonds.

Local Arab-Americans mobilized against the legislation, the Toledo Blade editorialized against it, and the Arab-American Institute paid for a poll which showed that 71.9 percent of those surveyed were opposed to buying Israeli bonds with tax dollars. Although the law passed, Arab groups want to mount a similar lobbying effort in California.

One factor that may help opponents of the California bill, sponsored by Assemblyman Burt Margolin (D) of California, is that the giant Public Employees Retirement System has come out against the legislation.

The Margolin bill is scheduled to be heard by a Senate committee this week. So far, an aide to Mr. Margolin says, little opposition has materialized. But Arab-Americans will try to raise a stir before the bill reaches the governor's desk, Timko says.